The market’s fixation of BHP Billiton Ltd.’s (BHP.AU) spinoff and the absence of a buyback at its results means it appears to have missed the value being created in its iron-ore unit, says UBS analyst Glyn Lawcock, who lifts his NPV estimate on the stock 10% to A$46.09. BHP’s Western Australia iron-ore division is now expected to expand to 290 million tons from 225 million tons for under US$50/ton of capex. It had previous been expected to lift capacity to 270 million for around US$100/ton, Lawcock says. “The reduction in capital intensity alone is a saving of around US$3 billion,” he says. “The inclusion of the lower capital intensity, lower unit costs and the additional 20 million tons per annum of future production has lifted our valuation for Western Australia Iron Ore from US$98 billion to US$110 billion.” UBS has a buy rating on the stock with a A$42.00 target.

My riposte using a $50 break even cost:

225mt at $90 per tonne is $9 billion profit

290mt at $80 per tonne is $8.7 billion profit

290mt at $70 per tonne is $5.8 billion profit

The margin squeeze is much more damaging than the volume growth. Once the risk is factored in, BHP becomes value trap.

4 Responses to “ “UBS says market missing BHP iron ore value”

A continual decline in prices and negative data published on the first day of September have left steel market participants in China concerned about the month, which is typically a peak season for the industry.

Iron ore futures on the Dalian Commodities Exchange slumped during the morning on Monday September 1 after China published weaker official manufacturing data and rebar futures slumped to a record low

BHP/Rio’s treatment of the Iron Ore market, has certain similes to Coles/Wesfarmers treatment of the domestic retail market???
Squeeze the margins, close out the competition (or buy them out at bargain basement prices) and then control the market/supply (as if they don’t already).

“The market’s fixation of BHP Billiton Ltd.’s (BHP.AU) spinoff and the absence of a buyback at its results means it appears to have missed the value being created in its iron-ore unit,”

No mention of commodity prices at all in that analysis. Are sell-side equity analysts the only ones incapable of seeing that that is the single most important factor in a miner’s ability to turn a profit, and that capital management etc can’t happen without that?

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